What Are Your Taxes Telling You?
They are always telling you something. It's just important to…listen!
As the dust settles after another tax season, many individuals and companies breathe a sigh of relief, having navigated the complexities of filing their taxes. However, the end of tax season also presents an excellent opportunity to reassess one's financial goals and consider strategic investment planning. Whether you received a tax refund, paid additional taxes, or remained relatively unchanged, there are several steps you can take to make the most of your financial situation in the post-tax season.
In this short article financial advisor Michael Ferrera shares with your 7 steps for better taxes next year.
Pause. Stop. Exhale and Evaluate Your Tax Situation
Before delving into investment planning, it's essential to reflect on your tax return. If you received a significant refund, consider adjusting your tax withholding to have more money in your pocket throughout the year rather than waiting for a lump sum at tax time. Conversely, if you owed taxes, reassess your tax planning strategies to minimize future tax liabilities. Understanding your tax situation provides valuable insights into your financial health and informs your investment decisions. The most important thing to remember here is that you can control it. Simple adjustments can make a major difference. Have some very simple conversations with your financial professionals to guide you in the appropriate direction.
Rebalance Your Portfolio
Reviewing and rebalancing your investment portfolio is a crucial step in post-tax season planning. Market fluctuations, changes in personal circumstances, and shifting financial goals may have caused your asset allocation to deviate from your desired targets. Take this opportunity to reallocate your investments according to your risk tolerance, investment timeline, and financial objectives. Consider diversifying across asset classes to mitigate risk and optimize returns over the long term.
Consider Contributing to Retirement Accounts
Now this might sound like a gimme, but hear me out. Maximizing contributions to retirement accounts, such as 401(k)s, IRAs, or Roth IRAs, should be a priority in your post-tax season investment plan. These tax-advantaged accounts offer significant benefits, including tax-deferred or tax-free growth and potential employer matches. Evaluate your contribution levels and adjust them if necessary to take full advantage of the available tax benefits and accelerate your retirement savings. Additionally, it's important to consider contributing to multiple types of retirement accounts to maximize diversification and long-term tax strategy. This is probably not a strategy you should try to figure out by yourself, because it could have a reverse affect, but should consult with your accountant or CPA that did your taxes along with other professionals to guide you.
Explore Tax-Efficient Investments
Incorporating tax-efficient investment strategies into your portfolio can help minimize tax liabilities and enhance after-tax returns. When you reach certain levels of income and taxes it is important to consider investing in municipal bonds, which offer tax-free interest income at the federal level and, in some cases, at the state and local levels. If you're in a state with no tax or in a state with high taxes, like California or New York, these can be very lucrative ways to implement a tax strategy. Additionally, exchange-traded funds (ETFs) and index funds tend to generate fewer capital gains distributions compared to actively managed mutual funds, making them tax-efficient investment vehicles.
Set Aside Emergency Money
Building and replenishing emergency savings should be a fundamental component of your post-tax season financial plan. An emergency fund provides a financial safety net to cover unexpected expenses, such as medical emergencies, car repairs, or job loss, without derailing your long-term investment strategy. Aim to set aside six months to eight months' worth of living expenses in a liquid, accessible account, such as a high-yield savings account or money market fund.
Consult with Financial Professionals
Seeking guidance from financial advisors or tax professionals can offer valuable insights and personalized recommendations tailored to your specific financial situation and goals. Whether you're considering tax optimization strategies, retirement planning, or investment diversification, a qualified professional can provide expertise and guidance to help you make informed decisions and navigate complex financial matters effectively. While this can often be overlooked, it is important to have a personal proactive approach on your financial planning. Speaking with your investment professional should be a two-way street. Make sure you are proactively in contact with them while they are also intentionally in contacting you. It should be a relationship that you both benefit from. We encourage you to hold your professionals accountable and contact them accordingly.
Stay Informed and Adapt
Finally, remain vigilant and stay informed about changes in tax laws, market trends, and economic developments that may impact your investment strategy. Economic conditions and regulatory environments are constantly evolving, requiring investors to adapt and adjust their plans accordingly. Regularly review your financial plan and investment portfolio to ensure they align with your objectives and risk tolerance.
In conclusion, the post-tax season period often is telling you something. What you should do, what you should not do or what to reconsidering as you work hard for your money this year. Regardless post-tax seaosn offers an opportune moment to reassess your financial situation and implement strategic investment planning strategies. By evaluating your tax situation, rebalancing your portfolio, maximizing retirement contributions, exploring tax-efficient investments, building wealth, consulting with professionals, and staying informed, you can position yourself for long-term financial success and achieve your goals. Take proactive steps today to secure a brighter financial future tomorrow.
It is important to remember that this article is not a recommendation to invest. While we are financial professionals it is important for you to consult with your personal professionals accordingly to understand your unique situation and how any ideas may apply accordingly.